Correctly diagnosing the nature of a disease is usually an essential first step to finding its cure. Similarly, knowing what caused this recession seems pretty pivotal to figuring out how to avoid falling into the next one.
Subprime mortgages may have blown up Wall Street, but it was triple-digit oil prices that blew up the world economy. This distinction is not just academic—it has huge implications for what steps governments should have taken and, maybe even more importantly, what steps they shouldn’t have taken.
While governments can bail out insolvent investment banks, foreclosed subprime mortgage holders and bankrupt auto producers, there can be no energy bailout. Neither the Federal Reserve Board nor the Treasury Department can create a single BTU of energy, nor can any other central bank or finance department around the world, no matter how much money they print or how big a budgetary deficit they rack up.
Having already blown the taxpayers’ wad bailing out everybody under the sun, what’s left in the government cookie jar to fight the next oil-induced recession?
The US budget deficit is already nearing one-and-a-half trillion dollars. Proportional to the size of the economy, it’s the highest it’s been since World War II.
So what happens the next time our economies encounter triple-digit oil prices?
With oil already trading at nearly $80 per barrel, I guess we’ll find out soon enough.
Not only do massive deficits leave no more budgetary room for further fiscal stimulus but, even worse, we will have to start paying back today’s bailouts just as tomorrow’s oil crisis slams the brakes on the economy again.
That means the next time motorists see four-dollar-per-gallon pump prices, they are likely to be hit at the same time with huge deficit-cutting tax increases and equally huge cuts in government spending.
Getting the last recession wrong not only means we are ill-equipped to deal with the next one, but also that it will be all the more severe when we have to start paying the bill for the policy moves we now have to reverse.
Fiscal pump priming and printing money aren’t the answer to triple-digit oil prices. Moving from a global economy to a local one is.
I’m Jeff Rubin, and I believe your world is about to get a whole lot smaller.